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TheStreet Open House

Frontier Communications Reports 2013 Second Quarter Results

Stocks in this article: FTR

Operating income for the second quarter of 2013 was $266.2 million (reflecting the gain on sale of Mohave, lower amortization, network access and other operating expenses, as well as the absence of integration costs, as compared to the second quarter of 2012) and operating income margin was 22.4 percent as compared to operating income of $250.8 million and operating income margin of 20.8 percent in the first quarter of 2013 and operating income of $267.8 million and operating income margin of 21.3 percent in the second quarter of 2012.

Losses on early extinguishment of debt for the second quarter of 2013 reflects losses of $159.8 million ($98.9 million, or $0.10 per share, after tax), recognized on the early extinguishment of debt. In April 2013, the Company completed a registered debt offering of $750.0 million aggregate principal amount of 7.625% senior unsecured notes due 2024, issued at a price of 100% of their principal amount. The Company received net proceeds of $736.9 million from the offering after deducting underwriting fees. The Company used the net proceeds from the sale of the notes, together with cash on hand, to finance the cash tender offers and debt retirements, as discussed below.

During the second quarter of 2013, the Company repurchased, through a cash tender offer, privately negotiated transactions and open market repurchases, $1,002.4 million aggregate principal amount of various senior notes for total consideration of $1,162.0 million, consisting of $194.9 million aggregate principal amount of the 6.625% senior notes due 2015; $277.9 million aggregate principal amount of the 7.875% senior notes due 2015; $433.8 million aggregate principal amount of the 8.250% senior notes due 2017; $17.3 million aggregate principal amount of the 8.125% senior notes due 2018; and $78.5 million aggregate principal amount of the 8.500% senior notes due 2020, respectively.

Interest expense for the second quarter of 2013 was $166.5 million as compared to $171.4 million in the first quarter of 2013, and $172.1 million in the second quarter of 2012. Interest expense declined primarily due to lower average debt levels resulting from the debt refinancing activities and debt retirements during the second quarter of 2013.

Income tax expense (benefit) for the second quarter of 2013 was a tax benefit of $(18.8) million as compared to a tax expense of $11.7 million in the second quarter of 2012, a $30.5 million decrease in tax expense, principally due to lower pretax income resulting from additional losses on the early extinguishment of debt. The Company had an effective tax rate for the second quarter of 2013 and 2012 of 32.8% and 34.8%, respectively. The second quarter of 2013 includes discrete tax items of the settlement of an IRS audit, changes in certain deferred tax balances and the reversal of uncertain tax positions with a combined impact of $6.8 million in additional income tax expense.

Net loss attributable to common shareholders of Frontier was $38.5 million, or $0.04 per share, in the second quarter of 2013, as compared to net income of $18.0 million, or $0.02 per share, in the second quarter of 2012. The second quarter of 2013 includes losses on the early extinguishment of debt of $159.8 million, severance costs of $4.3 million and discrete tax items of $6.8 million, partially offset by the gain on sale of Mohave of $14.6 million (combined impact of $99.8 million after tax). Excluding the impact of the aforementioned items, non-GAAP adjusted net income attributable to common shareholders of Frontier for the second quarter of 2013 would be $61.3 million, or $0.06 per share, as compared to $48.8 million, or $0.05 per share, in the first quarter of 2013 and $75.0 million, or $0.08 per share, in the second quarter of 2012.

Capital expenditures for Frontier business operations were $137.5 million for the second quarter of 2013 and $326.5 million for the first six months of 2013, as compared to $167.6 million in the second quarter of 2012 and $376.1 million for the first six months of 2012. Lower second quarter 2013 capital expenditures were primarily driven by the timing of the Company’s spend within the year.

Operating cash flow, as adjusted and defined by the Company in the attached Schedule A, was $557.3 million for the second quarter of 2013 resulting in an operating cash flow margin of 46.8 percent. Operating cash flow, as reported, of $564.0 million has been adjusted to exclude $14.6 million of gain on sale of Mohave partnership interest, $4.3 million of severance costs and $3.6 million of non-cash pension and other postretirement benefit costs.

Free cash flow, as defined by the Company in the attached Schedule A, was $175.9 million for the second quarter of 2013 and $382.1 million for the first six months of 2013. The Company’s dividend represents a payout of 57 percent of free cash flow for the second quarter of 2013 and 52 percent for the first six months of 2013.

Working Capital

At June 30, 2013, the Company had a working capital surplus of $128.8 million, which includes the classification of certain debt maturing in the second quarter of 2014 of $214.5 million as a current liability.

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